There's cheap and then there's CHEAP! / Goodbye Big 3 leasing?

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While the current bear market has been painful for everyone who is invested in the market, one benefit is that there are some amazingly cheap stocks out there right now. More than 100 companies in the S&P 500 (which according to my calculations is over 20% :) ) currently have single digit 2009 P/E ratios. This week's Barron's had an outstanding article on super cheap stocks. I don't like any of the financial stocks that the article mentioned because it talked about companies in relation to their book values and I definitely do not trust the book values of financials like Lehman Brothers or XL Capital, but here are a couple that I did find interesting:

- Gannett (GCI) - Gannett owns a number of newspapers and television stations in the United States and the United Kingdom, including the major national publication USA Today. GCI has been pounded by investors, dropping 54% so far this year after sliding 35% in 2007. I know that everyone hates newspapers and that it is supposedly a dying industry, but this stock is about as cheap as it gets, trading at only 6 times its estimated 2008 earnings and around half its stated book value. The company currently pays a 9% dividend that it should be easily able to cover. I realize that times are different today and that the Internet is eating away at the newspaper business, but when I look at Gannett I can't stop thinking about Warren Buffett's famous investment in the Washington Post years ago.

- ConocoPhillips (COP) - This is a company that I personally own and have blogged about a number of times in the past. Now normally I don't like cops, but I'll make an exception for this one. Instead of stealing your money by giving you tickets, this cop is printing it. ConocoPhillips currently trades at around only 6 times its estimated 2008 earnings. Investors appear to be afraid of the company's refinery operations, its disappointing exploration efforts, and the recent drop in the price of natural gas (it's North America's largest nat gas producer). But cheap is cheap and this company is a great value here.

- Marathon Oil (MRO) - As a former shareholder, I am fairly familiar with Marathon (remember I said that I was consolidating my positions into my best bets). MRO has gotten crushed lately, shedding 21% of its value over the past month. Its P/E ratio has slid all the way to an eye-popping 5.2. Sure the company has major exposure to the hated refining sector, but over half of its profits next year will come from its Exploration and Production arm. Also, many are mentioning MRO as a possible takeover target.

- Valero (VLO) - Speaking of refiners, Valero is possibly the best of breed. And get this, it currently only trades at 0.9 times book value. I know that crack spreads are terrible than they probably won't get better any time soon, but this stock is getting unbelievably cheap. If it continues to fall I may have to take a serious look at it, even though I got rid of all of my exposure to refiners (other than through COP) in 2007. I'm not ready to buy it yet though because I expect more pain for refiners in the near future. One thing that I like about Valero is that many of its refineries have the ability to refine sour crude, which is going to become increasingly important over the next several years because a lot of the light sweet oil has been used up.

- Terex (TEX) - Last but not least we have Terex. The manufacturer of construction and mining equipment has been firing on all cylinders lately. It's earnings were up 40% last quarter and its EPS ($2.32) beat analysts' estimates by a whopping $0.32. That's some amazing growth for a company that is currently trading at an estimated 7 times its 2008 earnings.

A couple of weeks ago I blogged about how I expected that automakers' captive finance companieswould eventually have to begin taking massive losses on the vehicles that they have leased over the past several years. Specifically I said:

"One major problem that I see coming down the road that I don't hear many people talking about is captive finance companies' huge residual value exposure. I don't have any specific data handy on how much exposure to leasing GMAC and Ford Credit currently have on their books, but I can assure you that they are getting hammered as the vehicles that they leased to consumers several years ago come back and aren't worth anywhere near what they had "estimated" they would be. I use the word estimated very loosely because most manufacturers have their captive finance companies artificially boost the residual values of the vehicles that they lease in order to provide consumers with attractive monthly payments and move more iron for their parent company" (see post: Liquidity is drying up in the auto industry).

Well, Ford reported its quarterly results last week and they were an absolute mess (see article: Ford's Worst Quarter Ever). It reported a second quarter loss of $8.7 billion as a result of "a writedown in the value of assets, and losses on falling values of SUVs coming off leases back to the automaker's Ford Motor Credit arm." Specifically, overestimated residual values accounted for a whopping $2.1 billion of the loss. Sound familiar? I never shorted Ford or GM in real life, it is probably a conflict of interest for me to do so not to mention the fact that it would probably be impossible to find shares to short right now anyhow, but I have been will remain short both of them in CAPS.

These residual value issues will continue to plague automakers. In fact, it has gotten so bad that Chrysler announced on Friday that it will no longer offer leases at all through Chrysler Financial (see article: Chrysler Halts Auto Leases). Between Chrysler pulling the plug on its program, the cost off funds increasing for automakers as their credit worsens, and their becoming more conservative on estimating vehicles' residual values, the days of cheap leases on domestic products may be coming to an end.

Excellent stuff. Great work on the off lease problem. And the stocks you highlight (with the exception of Gannett: the news paper business is going the way of the dinosaurs) are indeed candidates for long term investors!

I also read this Barron's article today, and was patting myself on the back for recent outperform picks on MRO, VLO and TEX. On the other hand, these securities all fit my usual value-based approach.

I'm absolutely with you on staying away from their distressed financial picks, particularly Lehman Bros. (LEH). I will quote Leon Cooperman of Omega Advisors from this same issue of Barron's:

"I determined many years ago that if you want to make money on Wall Street, you work there; you don't invest there. They just pay themselves too well. I would rather look elsewhere for investment opportunities."

Thanks leo. Yeah, of the five that I mentioned COP and TEX are definitely my favorites right now. Valero is interesting, but I still think that refiners have further to fall. I don't think that I could bring myself to actually buy a newspaper, but Gannett sure looks interesting so I figured that I'd throw it in there.

Great quote, colonel. Goodyear is very interesting. It has a ton of brand equity, unlike Bridgestone / Firestone. The problem with tire makers is they are getting hit from both sides, their input costs have skyrocketed at the same time that damand for their products have slowed. There's probably going to come a time where tire companies are screaming buys, but I don't think that we're there yet.

Ha, I know what you're saying Doug. I wouldn't smpke newspapers...but if you could drink them I probably would ;). I'm not putting real money into Gannett, but I can't believe how cheap it is right now. It still has TV stations and the USA Today brand. There has to be some value there. At least it's interesting to talk about and debate.

As I said though of the companies that I mentioned, the only two that I personally would put real funds in are TEX and COP.

I really appreciate that, alstry. I have no problem with anyone in CAPS, I just hate to see arguing rather than constructive posts. Having said that, I can certainly see how the sarcastic person you were debating with could rub you the wrong way.

Looks like you (and Mr. Cooperman) were right to avoid Lehman Brothers. I saw this blurb today on Market Watch:

LEH: Lehman Brothers Holdings Inc. tumbled 10%. The Securities and Exchange Commission is focusing on four rumors about the investment bank as part of a probe into potential market manipulation. In subpoenas sent to dozens of hedge funds and others, the SEC is asking for transcripts of calls, messages and payroll documents that mention the Federal Reserve's lending facility, hedge fund SAC Capital Advisors and bond-fund house Pacific Investment Management Co., or Pimco, people familiar with the matter told the newspaper. The SEC is trying to trace the rumors to their source, the report added.